Transcript

1.
The Fairshare Model
for Raising Venture Capital via
a Crowdfunded Initial Public Offering
Highlights of a book under construction
by Karl M Sjogren
Coming in 2014

2.
We Need Growth!
We Need Jobs!
Where’s the leadership?
Yes!
Yesterday!
Big Problem!
Something ought to be done!
I’m worried about the future.
When will recession end?
Why isn’t it happening?
Occupy Wall Street!
How do I prepare for the future?
This recession is different—we need new solutions!
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3.
What’s the Solution?
Fix the housing
Entrepreneurs!
market!
Healthy food!
Crowdfunding!
Get rid of
job-killing
Focus on and fix
regulations!
the problem!
More
Support jobeducation!
creators!
There’s an app
for that!
Get
government
out of the
way!
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Better
education!
Competent
Government!
New
Attitudes!
Reduce the deficit
Banks that lend
Throw the bums out!
Strengthen bank regulation!
Invest in the
Better
future!
regulations!
Encourage
innovation!
Yoga!
Create
opportunity!
More venture
capital!
Government – Business Partnerships!
Get ready for the new economy!
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10.
Target Companies
Companies that adopt the Fairshare Model:
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May have already raised 1-3 rounds from accredited investors.
Want to raise $2 to $10 million in public venture capital.
Can identify an affinity group of likely investors.
See advantage in having stock broadly held by the public.
Will use Performance Stock to attract and motivate talent.
Such a company will necessarily:
• Be confident it will deliver performance that results in conversion of
Performance Stock to Investor Stock
• Let public investors invest at low valuation.
• Offer protections provided to venture capital funds.
• Embrace the concept of investor oversight.
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11.
Possible Outcomes for Issuers
 Some companies will fail (start-ups face long odds).
 Some will be acquired by other companies.
• Performance Stock conversion will be determined by the holders of
Investor Stock and Performance Stock.
• Performance Stock deserves compensation if purchase price
delivers attractive return for Investor Stock.
 Some will raise more capital & trade on an exchange (NASDAQ).
• The growth may involve acquiring other companies.
 Some may convert to a conventional capital structure.
• Tried it, did not like it.
• A majority of each stock must agree on a new structure.
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13.
Who Will Like What?
Investors
Companies
Performance Stock is a POWERFUL competitive
advantage for managing human capital
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Broadly distributed Investor Stock creates evangelists
to promote the company’s interests
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Key Attributes of the Fairshare Model
Access to equity venture capital
Pre-IPO angel investors have an exit
Insiders do not get rich just because there is an IPO
To sell stock, must have bought it or earned it
Investors and insiders share voting control
Ability to acquire other companies with public stock
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14.
Fundamental Problem of a
Conventional Capital Structure
Assessing an early–stage company is as difficult as divining the adult
achievement of young child.
• Indicators are there, but can be wrong or misleading.
A conventional capital structure requires a company to strike a
valuation at each round of investment that pre-supposes performance.
• Valuation = Value of an idea, of future performance
• “The company is worth $100 million.”
Accredited investors are protected
from overpaying for a private
venture capital deal.
Investors in a public venture
capital deal are not protected
from overpaying.
A conventional model is NO
PROBLEM for them.
A conventional model is a BIG
PROBLEM for them.
But most don’t realize it.
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15.
Overpayment Protection: Who Has It
Accredited Investors
in a private venture
capital deal
OVERPAYMENT PROTECTION
Investors
in a public venture
capital deal
NO OVERPAYMENT PROTECTION
Know the deal valuation
Valuation-Unaware
They know how to calculate the price to
buy the company, given the deal terms.
Unaccredited investors do not know how to
calculate valuation nor its importance.
Get anti-dilution provisions
Provide price protection by re-pricing
investor shares lower if a subsequent
financing is at a lower valuation than the
round they bought into.
Issuers not obligated to disclose valuation, let alone
discuss why its reasonable. Unable to invest
earlier, small investors compete to pay “retail” for a
“wholesale” deal; they invest with the zeal of
“Black Friday” shoppers –but not for “deals”.
They have no protection from overpaying
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16.
What is a “Venture-Stage” Company?
A company with these risk factors:
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Market for its products/services is new/uncertain
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Unproven business model
•
Uncertain timeline to profitable operations
•
Negative cash flow from operations
• In other words, it requires investor cash to operate
•
Little or no sustainable competitive advantage
•
Execution risk; team may not build value for investors
Many public companies list such risk factors in their disclosure documents
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17.
Public Venture Capital
Private Venture
Capital
In substance,
Public Venture
Capital
capital provided
to a venture-stage company
…is “venture capital”….
… whether its from accredited investors…
…or from public investors!
Same Girl, Different Dress
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19.
Private Venture Capital Supply-Chain
Some accredited investors invest only in the early rounds.
• Angel investors are early investors, but seek VC funds to for
rounds over $1-2 million.
• VCs with operational expertise are the “lead institutional
investor” (i.e., evaluate deal, serve on board of directors) for
other investment funds that prefer to follow.
Others favor later rounds, after its apparent the company
is on-track to have an IPO or be acquired (i.e. exits are
visible).
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21.
What Best Explains the Trend?
Performance?
• To a degree
Risk reduction?
• See Risk Factors in a IPO prospectus
What the Next Guy (the public
or potential acquirer) may pay?
• Guestimate: this explains 30-60% of
the late pre-IPO valuation increase
The Fairshare Model book will posit a
Next Guy Theory for buyer behavior
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22.
Who is the Next Guy
for Unaccredited Investors?
There isn’t one…except
other public investors
Downside Exposure
Public investors at
greater risk of
overpaying for a venture
stage deal than pre-IPO
investors
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23.
Possibilities: Conventional Model
Valuations between
years 2-8 in this
example are better
explained…
by who the Next
Guy will be…
than by what
the company’s
performance is.
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24.
Possibilities: Fairshare Model
Same example,
but the valuation
(aggregate of Investor
Stock) is explained by
performance,
and it’s shared by
investors and
insiders, as
Performance Stock
converts to
Investor Stock.
IPO valuation comparable to what a VC might pay.
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25.
How to Begin?
Fairshare Model = disruptive innovation in the structure of securities.
– “Crowdfunding” is an innovation in the distribution of securities.
Innovations are challenging if they are not pushed by suppliers,
demanded by customers or required by government.
– “Dutch Auction” approach to IPO pricing. Good idea! Not pushed by “suppliers” (issuers,
investment banks), demanded by customers (those positioned to “flip” shares) nor required
by government or the self governing organizations that oversee exchanges.
Fairshare Model does not benefit existing players.
– Venture capital and private equity funds; investment bankers; Investors positioned to “flip”
hot IPO shares, or, IPO companies with a conventional capital structure
Issuers will not adopt it unless it helps them raise capital.
– General investor interest must be there.
It’s beneficiaries don’t realize they get a bad deal now, or, feel helpless.
– Valuation-unaware
– Weak understanding of investor protections
– More concerned with access to deals than with terms of deals
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26.
Concept Gap
Where the
Fairshare
Model is now
If Early Issuers and
Investors benefit,
more issuers will
adopt it
Should it become popular,
capitalism will have evolved
in interesting ways.
Better Capitalism!!!!
Should Investor Interest
be significant, some
issuers will adopt it
Concept
Gap
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27.
Help Narrow the Concept Gap
If the model appeals to you, please create buzz .
• Talk about the Fairshare Model
• Spread the word via social networking
• Join the community at www.fairsharemodel.com
to hear what others have to say—favorable or not.
The Fairshare Model
Needs You!
I will publish a book on the Fairshare Model by Q4 2014.
• I seek critical input from attorneys, financial
experts, angel investors, etc. while working on it.
Companies: my focus is to define a credible & attractive
equity capital option for you; if investor interest is there,
the next step will be to define “how-to” guidance.
Email me at karl@fairsharemodel.com
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28.
Better Capitalism…the new frontier
This is the construction of the
Fairshare Model.
It’s mission: to explore
new relationships between labor
and capital,
to help entrepreneurs finance
companies with public venture
capital,
to boldly go where no capital
structure has gone before.
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